AT&T Legal Summary of the Supreme Court Decision.
Re: AT&T v. Iowa Utilities Board.
Date: January 26, 1999.
Source: Jim McGann, AT&T.

January 26, 1999

SUMMARY OF SUPREME COURT DECISION ON APPEAL FROM 8^TH CIRCUIT OF FCC LOCAL COMPETITION RULES

This memorandum summarizes the Supreme Court's January 25, 1999 decision on the FCC's local competition rules.

The Supreme Court's decision largely reaffirms the FCC's August 8, 1996 local competition rules as consistent with the Act, rejects numerous arguments by incumbent LECs, and reverses significant portions of the 8^th Circuit's opinion.

• The Court reversed the 8^th Circuit and held that the FCC (and not the states) has jurisdiction to adopt regulations to implement all of the Act's provisions addressed to local competition, including those dealing with pricing of wholesale elements and services.
• The Court rejected arguments by incumbent LECs ("ILECs") and held that they must allow competitors to purchase any and all UNEs, individually or in combination, without regard to whether the competitor has its own facilities.
• The Court reversed the 8^th Circuit and reinstated the original FCC rule requiring ILECs to provide UNEs ordered in existing combinations without ripping the elements apart or imposing an additional "glue charge."
• The Court reversed the 8^th Circuit and reinstated the FCC’s "pick and choose" rule allowing competitors to select items they like from other interconnection agreements previously signed by an ILEC, without being required to subscribe to the entire agreement.
• The Court rejected ILEC arguments that Operations Support Systems ("OSS") and vertical features can never satisfy the Act's definition of a UNE.

The only issue on which the Court did not agree with the FCC concerns the standard for identifying which UNEs the ILECs are required to make available under the Act, and the application of that standard to particular UNEs. The Court ruled that the FCC had not sufficiently considered all of the relevant factors. It thus vacated the FCC’s current Rule (319) identifying and defining the UNEs that ILECs must make available, and remanded the issue to the FCC with instructions to reexamine the question and issue a new order. The Court's opinion, however, does not alter the requirement that RBOCs provide certain elements as a condition to receiving authorization pursuant to Section 271 to offer in-region long distance services.

In addition to the remand of the UNE issue to the FCC, the ILECs will now renew their challenges to the substantive validity of the FCC's pricing rules (i.e., TELRIC). The 8^th Circuit had refused to address those arguments based on its ruling (now reversed) that the FCC lacks jurisdiction to issue pricing rules.

Jurisdiction

The Court held that the FCC has jurisdiction to implement all of the 1996 Act's local competition provisions (i.e., Secs. 251 and 252). According to the Court, because Congress expressly made those provisions part of the Communications Act of 1934, and because the 1934 Act expressly authorizes the FCC to prescribe such rules and regulations as may be necessary to carry out the law's provisions, the FCC's rulemaking authority extends to implementation of the new provisions. Section 2(b) of the Act, which generally preserves the states' authority over "intrastate" matters, is inapplicable in light of these facts. The Court also noted that the attempt by ILECs and state commissions to invoke "states rights" in this circumstance was particularly unpersuasive, because "the question is not whether states will be allowed to do their own thing, but whether it will be the FCC or the federal courts that draw the lines to which [the states] must hew." The Court added that "a federal program administered by 50 independent state agencies," without oversight and guidance from a federal agency, "is surpassing strange."

The Court specifically held that the FCC "has jurisdiction to design a pricing methodology." Because it had ruled that the FCC has no jurisdiction to adopt pricing rules, the 8^th Circuit refused to consider the ILEC arguments that TELRIC and other pricing rules adopted by the FCC did not comply with the Act's mandate of "cost-based" rates. The ILECs will likely renew those arguments before the Court of Appeals.

In addition, the Court specifically reversed the 8^th Circuit's holding that the FCC has no jurisdiction to adopt rules to implement the Act's dialing parity (granting customers the ability to presubscribe to a CLEC for local and/or toll calls without having to dial additional digits) provisions as applied to intrastate calls The effect of this decision is to reinstate the FCC's rule requiring BOCs to implement intraLATA dialing parity by February 8, 1999.

UNE Rules

UNE Combinations

Affirming the 8^th Circuit, the Court held that the FCC reasonably rejected ILECs attempts to limit the availability of UNEs to carriers that intended to combine them with their own facilities to provide service. The 1996 Act imposes no such obligation; if anything, it suggests the opposite, by requiring in section 251(c)(3) that incumbents provide access to "any" requesting carrier.

Reversing the 8^th Circuit, the Court reinstated FCC Rule 315(b), which forbids ILECs from separating already-combined network elements, except at a CLEC's request. The Court found that the rule was supported by the Act's nondiscrimination requirements, which the FCC interpreted as prohibiting ILECs from "sabotaging" their network elements to "impose wasteful costs" on their competitors. According to the Court, "it is well within the bounds of the reasonable for the FCC to opt in favor of ensuring against an anticompetitive practice." The Court agreed with the FCC that "unbundled" does not mean "physically separate," but to establish separate prices in order to provide additional options.

Network Elements Subject to ILEC "Unbundling" Obligations

The Court vacated FCC Rule 319, which identifies and defines the UNEs that ILECs are required to make available to their competitors pursuant to Section 251(c)(3). The Court reasoned that the FCC did not adequately consider Section 251(d)(2), which requires the FCC to consider whether access to a particular UNE is "necessary" for CLECs to provide service, and whether the unavailability of a "proprietary" UNE would "impair" CLECs' ability to compete. According to the Court, the FCC essentially ignored these standards by requiring ILECs to make available any UNE upon a showing of technical feasibility. The FCC is required to consider the availability of elements outside the ILEC's network, and cannot regard any increased cost or decreased service quality as establishing a "necessity" and an "impair[ment]" of the ability to provide service.¹

The FCC must now conduct an additional rulemaking proceeding to consider again what UNEs must be made available, under the Act's standards as interpreted by the Court. It is important to note, however, that section 271 independently requires BOCs to provide at least some of the elements at issue as a condition to receiving authorization to offer in-region long distance services.² The Court's opinion does not remove that obligation.

OSS/Vertical Features

The Court rejected the ILECs' claims that OSS and vertical features do not meet the Act's definition of a UNE because they are not discrete physical facilities. "Given the breadth of the [Act's] definition [of UNE], it is impossible to credit the incumbents' argument that a UNE must be part of the physical facilities and equipment."

Pick and Choose

Reversing the 8^th Circuit, the Court reinstated the FCC's rule allowing a CLEC to order particular items out of another CLEC's interconnection agreement with the same ILEC, without being required to subscribe to the entire agreement. The Court noted that the FCC's rule was not merely a reasonable interpretation of the Act, but "track[ed] the pertinent statutory language almost exactly."

1 Justice Souter dissented from this portion of the Court's opinion.

2 These include local loops, transport, and switching; directory assistance services and operator call completion services; databases and associated signaling necessary for call routing and completion; 911 and E911 services; and white pages directory listings.

January 25, 1999

AT&T REACTION TO SUPREME COURT RULING UPHOLDING FCC
AUTHORITY ON ESTABLISHING GUIDELINES FOR COMPETITION

(The following may be attributed to Jim Cicconi, AT&T general counsel.)

The Supreme Court’s decision today is a victory for local telephone customers and for the local competition intended by the Telecom Act of 1996.

AT&T is delighted the Court has confirmed that the Telecom Act established a national policy in support of local competition. It’s especially good news the Court upheld the FCC’s rules prohibiting local monopolies from misusing their control of network elements to inhibit competitors from entering the local market.

Although the Court vacated and sent back an FCC rule that defines network elements, the decision does not mean that the FCC’s list of elements is wrong – merely that the FCC needs to consider additional factors in defining network elements.

As the FCC and state regulators assess and implement this important decision, we look forward to working with them to ensure that all Americans can finally have a choice in local telephone service.

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Contact:

Jim McGann
202-457-3942
or
Rochelle Cohen
202-457-3933